Home >Companies >News >Maruti may be able to ride out downturn better than its peers

Maruti Suzuki India Ltd (MSIL), the country’s largest passenger vehicle manufacturer, may be in a relatively better position to deal with the covid-19-induced economic downturn than most of its peers due to its exposure in the hatchback segment and wide network in the semi-urban and rural markets, according to sector analysts with brokerage firms.

With passenger vehicle sales expected to decline in double digits this fiscal, Maruti’s cash reserves of more than 34,000 crore will also hold the firm in good stead during these trying times, the analysts said.

The New Delhi-based company was expected to lose market share starting this fiscal due to the lack of products in the fast-growing and profitable sport utility vehicle (SUV) segment and its decision to pull out of the diesel vehicle market.

Due to the pandemic, most brokerages believe that customers’ affordability has taken a hit and most would prefer cars such as hatchbacks, entry-level sedans and compact SUVs, and a recovery in demand may start from semi-urban towns and rural areas. Maruti is believed to be in a better position than others that depend on one or two key products to drive sales.

“With an uncertain outlook, Maruti Suzuki would be the fastest to recover on account of its strong brand equity and strength in entry- and mid-segment passenger vehicles. The company’s 4QFY20 result is a mere reflection of the 10 days of lockdown in March, with the worst yet to come in the first half of FY21. While the pain of the covid-19 crisis would result in a very weak FY21, we expect MSIL to come back stronger and recover faster than peers," Jinesh Gandhi and Vipul Agrawal, analysts at Motilal Oswal Securities, said in a note on Thursday.

Maruti on Wednesday reported a 28% year-on-year (y-o-y) drop in profit and 17% y-o-y decline in sales for the March quarter due to tepid demand, exacerbated by a nationwide lockdown to curb the spread of covid-19.

Shaukat Ali, an analyst at Asian Markets Securities, said that given the strong SUV product pipeline of competitors such as Tata Motors, Great Wall Motors, Kia Motors and Hyundai Motors, there was a view till early March that Maruti will face severe market share erosion going forward. “However, the covid-19 outbreak has severely dented the demand pattern and we feel that passenger vehicle demand to remain lopsided towards entry segment hatchbacks, where Maruti Suzuki India has a strong presence with a long array of time-tested models. We feel this trend is likely to be prominent for 12-18 months, leading to an expected outperformance by Maruti Suzuki India in the coming years," he said.

The pandemic is likely to adversely impact vehicle demand across categories due to a sharp drop in affordability. Some dealerships have witnessed a sharp increase in order cancellations.

“With this sharp drop in volumes, Maruti and other players in the passenger vehicle market will come under huge pressure. Given the company’s reserves of 34,000 crore, wide distribution in semi-urban and rural places and large portfolio of hatchbacks, Maruti is relatively better placed to deal with the slowdown in the short term," an analyst with a foreign brokerage said on condition of anonymity.

Some brokerages are apprehensive of Maruti’s ability to protect its market share. “We model in 17% volume decline in FY21, which puts Maruti back in FY11 volumes. We believe Maruti’s earnings recovery faces headwinds like discretionary demand slowdown, market share challenges in profitable SUV segments and industry-wide lower capacity utilizations likely to keep competitive intensity elevated," ICICI Securities analysts Nishant Vyas and Pratit Vajani said in a note on Thursday.

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